Improving China’s Municipal Finance

Urbanization has been among the most important trends in China over the past three decades. It began with market reform and opening in the 1980s and has brought 500 million people into cities. During the decade of 2000 to 2010 alone, China’s urban population grew by 210 million, even when the country’s overall population grew by just 73 million. Shanghai’s population grew by 44 percent between the 2000 and 2010 censuses, from 16 million to 23 million. In Beijing during the three years of 2008-2010, its population grew by 500,000 each year.

Despite an inauspicious start, China’s spectacular economic growth performance seems prima facie evidence that the government has managed the urbanization process well enough. New cities have cropped up. Existing cities have expanded. City centers have been renovated and modernized, infrastructure built, and urban facilities appear to be keeping up with demand. Visitors to China fly into world-class airports and are whisked into town on multi-lane expressways. The cities are crisscrossed by wide boulevards, and China is setting world records in the pace at which subway lines are being built.

Behind this shiny façade, however, lies a more complex story. The system of public finance for municipalities is in tatters and in need of urgent repair. It encourages too much investment and imposes too little monitoring and control on decision-makers, producing inefficient, risky behavior that has brought a host of microeconomic and macroeconomic problems.

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